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Slow Down, Obama!

The rush to pass financial reform might cure some of the ills that plagued health care. But even the elites don’t understand this stuff. Matthew Yglesias on the ups and downs of moving too fast.

For those of us who wrote extensively about the health-care reform process, the striking thing about the motion of financial reform legislation through the United States Senate is the incredible speed with which it’s being done. Democrats don’t just want a bipartisan bill; they literally cannot pass a bill unless at least one Republican will vote for it. But instead of engaging in the sort of open-ended bargaining that characterized Max Baucus’ ultimately futile “Gang of Six” process, Chris Dodd swiftly moved a bill through committee and Harry Reid has committed to holding cloture votes this week. The point is to put pressure on Republicans to actually strike a deal, and not just use negotiations as an excuse for delay. The longer they wait, the more time they need to cast unpopular votes against holding Wall Street accountable.

Progressives are basically left to hope that Tim Geithner knows what he's doing. That’s a big contrast with the health-care battle—in which the basic idea was much bigger than any one politician.

It’s a politically smart strategy, and in many ways it’s a good strategy, but it carries with it some substantial costs. It means we’re looking at a bill that punts on many of the biggest issues. It means that neither the broad public nor the narrower circle of policy elites and experts and semi-experts have a firm grasp of the relevant questions. And this in turn means that we’ve got a bill whose main premise is that we need to trust the same institutions and many of the same people who were arguably responsible for the crisis in the first place. Progressives are basically left to hope that Tim Geithner knows what he's doing. That’s a big contrast with the health-care battle—in which the basic idea was much bigger than any one politician. The case for speed, however, is fairly strong and comes in three parts.

First, one lesson of health care is that lengthy negotiations can be sabotaged by bad faith. During the summer of 2009, Baucus held extended negotiations with Chuck Grassley and other Republicans who never signed on to any version of comprehensive health reform or offered any concrete proposals that would earn their votes. Instead Grassley, like Senator Olympia Snowe, offered vague complaints about the process and the need for more time. Meanwhile, hard-core conservatives hammered the non-existent proposal as containing “death panels” and all manner of evils and the Democrats were left with no specific bill to defend. With things like Mitch McConnell and John Cornyn
holding secret meetings to pitch the GOP as Wall Street’s best friend, there were signs of similar bad faith emerging.

Second, as the health care process dragged on, it was hard to say that the bill got better. It would be nice to think that deliberation would improve policy, but for the most part it seemed to lead to hostage-taking and shakedowns ending in the infamous farce of the Cornhusker Kickback.

Third, one specific concern I heard repeatedly from administration officials before the financial regulation ball really got rolling was that the issue was too complicated for the public to ever grasp in detail. The risk was that special interest groups, whose lobbyists are certainly capable of understanding legislation in a fine-grained way, could use an extended process to turn the bill into Swiss cheese, leaving us to pass a useless bill to much fanfare. Better to have technocrats write a decent bill, then let them ride public outrage at Wall Street to a swift and glorious victory.

This last consideration, however, also highlights the problem with the speed approach. On many aspects of financial regulatory reform, there’s no real consensus among reputable analysts about what should be done. Is the existence of big banks a problem, or does Canada’s stable and highly concentrated banking system prove that it’s a red herring? Should we fix the ratings agencies by regulating them more stringently, or do we need to
deregulate and increase competition? What should happen to Fannie Mae and Freddie Mac? Given that we need to limit leverage, how much should we limit it before we start adversely impacting growth?

The bill substantially punts on these questions, either not addressing them at all or else merely instructing regulators to come up with an answer. In part, that’s what speed required. And in part it’s the inevitable result of a process driven by technocrats rather than lengthy congressional deliberation. Which means that we’re looking at a bill that basically gives regulators the tools they say, in retrospect, they would have needed to prevent the crisis. That’s a pretty good idea, but it naturally raises the question of why they didn’t ask for these tools at the time. Instead of having a far-reaching debate that touches on the fundamental role of finance in our society and the relationship of banking to government, we’re updating the regulatory toolkit.

It can’t hurt and it just might work, but it’s hard to feel too confident that the issues have really been addressed.